UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March
31, 2017



OR



|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from _________
to ___________.



Commission file number: 1-16027







LANTRONIX, INC.

(Exact name of registrant as specified
in its charter)



|Delaware                                                       | 33-0362767                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)



7535 Irvine Center Drive, Suite 100,
Irvine, California

(Address of principal executive offices)



92618

(Zip Code)



(949) 453-3990

(Registrant’s telephone number,
including area code)



Not
Applicable

(Former name, former address and former
fiscal year, if changed since last report)



Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No o



Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes x
No o



Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):



|Large accelerated filer o                                            |  | Accelerated filer o        
|-------------------------------------------------------------------- |  | ---------------------------
|Non-accelerated filer o(Do not check if a smaller reporting company) |  | Smaller reporting company x
|Emerging Growth Company  o                                           |  |                            



If an emerging
growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o



Indicate by check mark
whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o
No x



As of April 21, 2017,
there were 17,586,884 shares of the registrant’s common stock outstanding.












LANTRONIX, INC.



FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

MARCH 31,
2017



INDEX

|         |                                                                                                                       | Page
|-------- | --------------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                       |     
|         | CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS                                                                  | 3   
|         |                                                                                                                       |     
|PART I.  | FINANCIAL INFORMATION                                                                                                 | 4   
|         |                                                                                                                       |     
|Item 1.  | Financial Statements                                                                                                  | 4   
|         |                                                                                                                       |     
|         | Unaudited Condensed Consolidated Balance Sheets at March 31, 2017 and June 30, 2016                                   | 4   
|         |                                                                                                                       |     
|         | Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2017 and 2016 | 5   
|         |                                                                                                                       |     
|         | Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016                     | 6   
|         |                                                                                                                       |     
|         | Notes to Unaudited Condensed Consolidated Financial Statements                                                        | 7   
|         |                                                                                                                       |     
|Item 2.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                 | 14  
|         |                                                                                                                       |     
|Item 3.  | Quantitative and Qualitative Disclosures about Market Risk                                                            | 21  
|         |                                                                                                                       |     
|Item 4.  | Controls and Procedures                                                                                               | 21  
|         |                                                                                                                       |     
|PART II. | OTHER INFORMATION                                                                                                     | 22  
|         |                                                                                                                       |     
|Item 1.  | Legal Proceedings                                                                                                     | 22  
|         |                                                                                                                       |     
|Item 1A  | Risk Factors                                                                                                          | 22  
|         |                                                                                                                       |     
|Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                                                           | 22  
|         |                                                                                                                       |     
|Item 3.  | Defaults Upon Senior Securities                                                                                       | 22  
|         |                                                                                                                       |     
|Item 4.  | Mine Safety Disclosures                                                                                               | 22  
|         |                                                                                                                       |     
|Item 5.  | Other Information                                                                                                     | 22  
|         |                                                                                                                       |     
|Item 6.  | Exhibits                                                                                                              | 22  







2






CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS



This Quarterly Report on Form 10-Q for the three months ended
March 31, 2017, or this Report, contains forward-looking statements within the meaning of the federal securities laws, which statements
are subject to substantial risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor
from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical
fact included in this Report, or incorporated by reference into this Report, are forward-looking statements. Throughout this Report,
we have attempted to identify forward-looking statements by using words such as “may,” “believe,” “will,”
“could,” “project,” “anticipate,” “expect,” “estimate,” “should,”
“continue,” “potential,” “plan,” “forecasts,” “goal,” “seek,”
“intend,” other forms of these words or similar words or expressions or the negative thereof. In particular, this Report
contains forward-looking statements relating to, among other things:



| | · | predictions about our earnings, revenues, margins, expenses or other financial matters;
| | - | ---------------------------------------------------------------------------------------



| | · | forecasts of our financial condition, results of operations, liquidity position, or
    working     capital     requirements;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | our ability to comply with certain financial obligations in our loan agreement;                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                      
| | · | the impact of changes to our share-based awards and any related changes to our share-based
    compensation expenses;
| |   |                                                                                                                      
| | · | the impact of future offerings and sales of our debt or equity
    securities;                                       



| | · | the impact of changes in our relationship with our customers;
| | - | -------------------------------------------------------------



| | · | plans or expectations with respect to our product development activities, business strategies or restructuring and expansion activities;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| | · | demand for our products or for the products of our competitors;
| | - | ---------------------------------------------------------------



| | · | the impact of pending litigation, including outcomes of such litigation;
| | - | ------------------------------------------------------------------------



| | · | the impact of our response to and implementation of recent accounting pronouncements
    on     our     financial     statements and the related disclosures;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                              
| | · | sufficiency of our internal controls and procedures; and                                                                                                     



| | · | assumptions or estimates underlying any of the foregoing.
| | - | ---------------------------------------------------------



We have based our forward-looking statements
on management’s current expectations and projections about trends affecting our business and industry and other
future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so,
we cannot guarantee their accuracy. Forward-looking statements are subject to substantial risks and uncertainties that
could cause our future business, financial condition, results of operations or performance, to differ materially from
our historical results or those expressed or implied in any forward-looking statement contained in this Report. Some of the
risks and uncertainties that may cause actual results to differ from those expressed or implied in the forward-looking
statements are described in “Risk Factors” included in Part II, Item 1A of this Report, in “Risk
Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed
with the Securities and Exchange Commission, or the SEC, on August 24, 2016, or the Form 10-K, as well as in our other public
filings with the SEC. In addition, actual results may differ as a result of additional risks and uncertainties of which we
are currently unaware or which we do not currently view as material to our business.



You should read this Report in its
entirety, together with the documents that we file as exhibits to this Report and the documents that we incorporate
by reference into this Report, with the understanding that our future results may be materially different from what we currently
expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent
or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to
changes in our opinions or expectations, except as required by applicable law or the rules of The Nasdaq Stock Market, LLC. If
we do update or correct any forward-looking statements, investors should not conclude that we will make additional updates or corrections.



We qualify all of our forward-looking statements by these
cautionary statements.







3






PART I. FINANCIAL INFORMATION



|Item 1. |  | Financial Statements
|------- |  | --------------------



LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands)





|                                           |  | March 31, |          |   | June 30, |  
|------------------------------------------ |  | --------- | -------- | - | -------- | -
|                                           |  | 2017      |          |   | 2016     |  
|Assets                                     |  |           |          |   |          |  
|Current assets:                            |  |           |          |   |          |  
|Cash and cash equivalents                  |  | $         | 7,389    |   |          | $
|Accounts receivable, net                   |  |           | 2,827    |   |          |  
|Inventories, net                           |  |           | 7,664    |   |          |  
|Contract manufacturers' receivable         |  |           | 314      |   |          |  
|Prepaid expenses and other current assets  |  |           | 536      |   |          |  
|Total current assets                       |  |           | 18,730   |   |          |  
|Property and equipment, net                |  |           | 1,278    |   |          |  
|Goodwill                                   |  |           | 9,488    |   |          |  
|Other assets                               |  |           | 49       |   |          |  
|Total assets                               |  | $         | 29,545   |   |          | $
|                                           |  |           |          |   |          |  
|Liabilities and stockholders' equity       |  |           |          |   |          |  
|Current liabilities:                       |  |           |          |   |          |  
|Accounts payable                           |  | $         | 2,719    |   |          | $
|Accrued payroll and related expenses       |  |           | 2,623    |   |          |  
|Warranty reserve                           |  |           | 116      |   |          |  
|Other current liabilities                  |  |           | 3,344    |   |          |  
|Total current liabilities                  |  |           | 8,802    |   |          |  
|Long-term capital lease obligations        |  |           | 71       |   |          |  
|Other non-current liabilities              |  |           | 378      |   |          |  
|Total liabilities                          |  |           | 9,251    |   |          |  
|                                           |  |           |          |   |          |  
|Commitments and contingencies (Note 7)     |  |           |          |   |          |  
|                                           |  |           |          |   |          |  
|Stockholders' equity:                      |  |           |          |   |          |  
|Common stock                               |  |           | 2        |   |          |  
|Additional paid-in capital                 |  |           | 210,104  |   |          |  
|Accumulated deficit                        |  |           | (190,183 | ) |          |  
|Accumulated other comprehensive income     |  |           | 371      |   |          |  
|Total stockholders' equity                 |  |           | 20,294   |   |          |  
|Total liabilities and stockholders' equity |  | $         | 29,545   |   |          | $









See accompanying
notes.



4








LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS

(In thousands, except per share data)





|                                                   |  | Three Months Ended |        |   | Nine Months Ended |  
|-------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                   |  | March 31,          |        |   | March 31,         |  
|                                                   |  | 2017               |        |   | 2016              |  
|Net revenue (1)                                    |  | $                  | 11,524 |   |                   | $
|Cost of revenue                                    |  |                    | 5,126  |   |                   |  
|Gross profit                                       |  |                    | 6,398  |   |                   |  
|Operating expenses:                                |  |                    |        |   |                   |  
|Selling, general and administrative                |  |                    | 4,414  |   |                   |  
|Research and development                           |  |                    | 2,126  |   |                   |  
|Total operating expenses                           |  |                    | 6,540  |   |                   |  
|Loss from operations                               |  |                    | (142   | ) |                   |  
|Interest expense, net                              |  |                    | (5     | ) |                   |  
|Other income, net                                  |  |                    | 2      |   |                   |  
|Loss before income taxes                           |  |                    | (145   | ) |                   |  
|Provision for income taxes                         |  |                    | 17     |   |                   |  
|Net loss                                           |  | $                  | (162   | ) |                   | $
|                                                   |  |                    |        |   |                   |  
|Net loss per share (basic and diluted)             |  | $                  | (0.01  | ) |                   | $
|                                                   |  |                    |        |   |                   |  
|Weighted-average common shares (basic and diluted) |  |                    | 17,522 |   |                   |  
|                                                   |  |                    |        |   |                   |  
|Net revenue from related parties                   |  | $                  | –      |   |                   | $



(1) Includes net revenue
from related parties







See accompanying
notes.





5






LANTRONIX, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS

(In thousands)





|                                                                                          |  | Nine Months Ended |       
|----------------------------------------------------------------------------------------- |  | ----------------- | ------
|                                                                                          |  | March 31,         |       
|                                                                                          |  | 2017              |       
|Operating activities                                                                      |  |                   |       
|Net loss                                                                                  |  | $                 | (225  
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                   |       
|Share-based compensation                                                                  |  |                   | 645   
|Depreciation                                                                              |  |                   | 455   
|Provision for excess and obsolete inventories                                             |  |                   | 74    
|Changes in operating assets and liabilities:                                              |  |                   |       
|Accounts receivable                                                                       |  |                   | 337   
|Inventories                                                                               |  |                   | (1,154
|Contract manufacturers’ receivable                                                        |  |                   | 55    
|Prepaid expenses and other current assets                                                 |  |                   | 44    
|Other assets                                                                              |  |                   | 11    
|Accounts payable                                                                          |  |                   | (19   
|Accrued payroll and related expenses                                                      |  |                   | 806   
|Warranty reserve                                                                          |  |                   | (22   
|Other liabilities                                                                         |  |                   | 457   
|Cash received related to tenant lease incentives                                          |  |                   | –     
|Net cash provided by (used in) operating activities                                       |  |                   | 1,464 
|                                                                                          |  |                   |       
|Investing activities                                                                      |  |                   |       
|Purchases of property and equipment                                                       |  |                   | (144  
|Net cash used in investing activities                                                     |  |                   | (144  
|                                                                                          |  |                   |       
|Financing activities                                                                      |  |                   |       
|Tax withholding paid on behalf of employees for restricted shares                         |  |                   | (144  
|Proceeds from borrowings on line of credit                                                |  |                   | –     
|Payment of borrowings on line of credit                                                   |  |                   | –     
|Net proceeds from issuances of common stock                                               |  |                   | 300   
|Payment of capital lease obligations                                                      |  |                   | (49   
|Net cash provided by (used in) financing activities                                       |  |                   | 107   
|Increase (decrease) in cash and cash equivalents                                          |  |                   | 1,427 
|Cash and cash equivalents at beginning of period                                          |  |                   | 5,962 
|Cash and cash equivalents at end of period                                                |  | $                 | 7,389 





See accompanying
notes.



6








LANTRONIX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

MARCH 31, 2017



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



The Company



Lantronix, Inc. (the “Company,” “Lantronix,”
“we,” “our,” or “us”) is a global provider of secure data access and management for Internet
of Things (“IoT”) and information technology assets. Our mission is to be the leading provider of IoT gateways that
enable companies to dramatically simplify the creation, deployment, and management of IoT projects while providing secure access
to data for applications and people.



Basis of Presentation



The accompanying unaudited condensed consolidated financial
statements of Lantronix have been prepared in accordance with United States generally accepted accounting principles (“U.S.
GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Securities
and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they should be read in conjunction with the audited consolidated
financial statements and notes thereto for the fiscal year ended June 30, 2016, included in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2016, which was filed with the SEC on August 24, 2016. The unaudited condensed consolidated financial
statements contain all normal recurring accruals and adjustments that in the opinion of management, are necessary to present fairly
the consolidated financial position of Lantronix at March 31, 2017, the consolidated results of our operations for the three
and nine months ended March 31, 2017 and our consolidated cash flows for the nine months ended March 31, 2017. All intercompany
accounts and transactions have been eliminated. It should be understood that accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The results of operations for the three and nine months ended March 31,
2017 are not necessarily indicative of the results to be expected for the full year or any future interim periods.



Recent Accounting Pronouncements



In January 2017, the Financial Accounting Standards Board (“FASB”)
issued guidance to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will be the amount by which
a reporting unit’s carrying value exceeds its fair value. Companies will continue to have the option to perform a qualitative
assessment to determine if a quantitative impairment test is necessary. The guidance will be effective for Lantronix for the fiscal
year beginning July 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. We are currently considering the effective date on which we plan to adopt this guidance.



In March 2016, FASB issued accounting guidance that changes
how companies account for certain aspects of share-based payments to employees. Among other things, under the new guidance companies
will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but
will instead record such items as income tax expense or benefit in the income statement, and APIC pools will be eliminated. Companies
will apply this guidance prospectively. Another component of the new guidance allows companies to make an accounting policy election
for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated,
as required historically, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs
to be adopted using a modified retrospective approach. Lantronix adopted this guidance early for the fiscal year beginning July
1, 2016. In connection with the adoption, we have elected to recognize the impact of forfeitures on our share-based compensation
expense as such forfeitures occur. Accordingly, as of July 1, 2016, we recorded a cumulative effect adjustment of approximately
$6,000 to increase APIC and accumulated deficit. Going forward, we do not expect the adoption of this guidance to have a material
effect on our financial statements.



In February 2016, FASB issued an accounting standard that revises
lease accounting guidance. The standard requires lessees to put most leases on their balance sheets, but recognize expenses on
their income statements in a manner similar to the previous guidance. The standard will be effective for Lantronix in the fiscal
year beginning July 1, 2019. Early adoption is permitted. We are currently evaluating the impact of this standard on our financial
statements and related disclosures.



In August 2014, FASB issued an accounting standard which requires
management of an entity to assess, for each annual and interim period, if there is substantial doubt about the entity’s ability
to continue as a going concern within one year of the financial statement issuance date. The definition of substantial doubt within
the new standard incorporates a likelihood threshold of “probable” similar to the use of that term under current U.S.
GAAP for loss contingencies. Certain disclosures are required if conditions give rise to substantial doubt about the entity’s
ability to continue as a going concern. The standard became effective for Lantronix for the fiscal year beginning July 1, 2016.
The adoption of this standard did not have a material impact on our financial statements and related disclosures.







7






Revenue from Contracts with Customers



In May 2014, FASB issued an accounting standard which superseded
existing revenue recognition guidance under current U.S. GAAP. The standard is a comprehensive revenue recognition model that requires
a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration
it expects to receive in exchange for those goods or services. In doing so, among other things, companies will generally need to
use more judgment and make more estimates than under the current guidance. Recently, FASB has issued guidance clarifying certain
topics such as (i) gross versus net revenue reporting, (ii) identifying performance obligations and licensing and (iii) accounting
for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer.



The standard permits two methods of adoption: (i) retrospectively
to each prior reporting period presented (the full retrospective method), or (ii) retrospectively with the cumulative effect of
initially applying the standard recognized at the date of initial application (the cumulative catch-up transition method). We currently
anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented.



The standard will be effective for Lantronix in the fiscal year
beginning July 1, 2018, with an option to adopt the standard in the fiscal year beginning July 1, 2017. We are currently considering
the effective date on which we plan to adopt the standard.



We currently anticipate the standard will have a material impact
on our financial statements and disclosures. We continue to make progress in assessing all potential impacts of the standard, including
any impacts of recently issued amendments. We currently believe the most significant impact of the standard relates to our accounting
for sales made to distributors under agreements which contain a limited right to return unsold products and price adjustment provisions.
Under the existing revenue guidance, we have historically concluded that the price to these distributors is not fixed and determinable
at the time we deliver products to them. Accordingly, revenue from sales to these distributors has not historically been recognized
until the distributor resells the product. By contrast, under the new standard, we expect to recognize revenue, including estimates
for applicable variable consideration, predominately at the time of shipment to these distributors.



|2. | Supplemental Financial Information
|-- | ----------------------------------



Inventories



Inventories are stated at the lower of cost (first-in, first-out)
or net realizable value and consist of the following:





|                                    |  | March 31,      |       |  | June 30, |  
|----------------------------------- |  | -------------- | ----- |  | -------- | -
|                                    |  | 2017           |       |  | 2016     |  
|                                    |  | (In thousands) |      
|Finished goods                      |  | $              | 4,471 |  |          | $
|Raw materials                       |  |                | 2,064 |  |          |  
|Finished goods held by distributors |  |                | 1,129 |  |          |  
|Inventories, net                    |  | $              | 7,664 |  |          | $









8






Other Liabilities



The following table presents details of our other liabilities:





|                                    |  | March 31,      |       |  | June 30, |  
|----------------------------------- |  | -------------- | ----- |  | -------- | -
|                                    |  | 2017           |       |  | 2016     |  
|                                    |  | (In thousands) |      
|Current                             |  |                |       |  |          |  
|Customer deposits and refunds       |  | $              | 1,051 |  |          | $
|Accrued raw materials purchases     |  |                | 599   |  |          |  
|Deferred revenue                    |  |                | 179   |  |          |  
|Capital lease obligations           |  |                | 60    |  |          |  
|Taxes payable                       |  |                | 280   |  |          |  
|Accrued operating expenses          |  |                | 1,175 |  |          |  
|Total other current liabilities     |  | $              | 3,344 |  |          | $
|                                    |  |                |       |  |          |  
|Non-current                         |  |                |       |  |          |  
|Deferred rent                       |  | $              | 206   |  |          | $
|Deferred revenue                    |  |                | 172   |  |          |  
|Total other non-current liabilities |  | $              | 378   |  |          | $



Computation of Net Loss per Share



Basic and diluted net loss per share is calculated
by dividing net loss by the weighted-average number of common shares outstanding during the applicable period.



The following table presents the computation
of net loss per share:





|                                                               |  | Three Months Ended |                                       |   | Nine Months Ended |  
|-------------------------------------------------------------- |  | ------------------ | ------------------------------------- | - | ----------------- | -
|                                                               |  | March 31,          |                                       |   | March 31,         |  
|                                                               |  | 2017               |                                       |   | 2016              |  
|                                                               |  |                    | (In thousands, except per share data) |  
|Numerator:                                                     |  |                    |                                       |   |                   |  
|Net loss                                                       |  | $                  | (162                                  | ) |                   | $
|Denominator:                                                   |  |                    |                                       |   |                   |  
|Weighted-average common shares outstanding (basic and diluted) |  |                    | 17,522                                |   |                   |  
|                                                               |  |                    |                                       |   |                   |  
|Net loss per share (basic and diluted)                         |  | $                  | (0.01                                 | ) |                   | $





The following table presents the common stock equivalents excluded
from the diluted net loss per share calculation, because they were anti-dilutive for the periods presented. These excluded
common stock equivalents could be dilutive in the future.



|                         |  | Three Months Ended |                |  | Nine Months Ended | 
|------------------------ |  | ------------------ | -------------- |  | ----------------- | 
|                         |  | March 31,          |                |  | March 31,         | 
|                         |  | 2017               |                |  | 2016              | 
|                         |  |                    | (In thousands) | 
|Common stock equivalents |  |                    | 1,062          |  |                   | 













9






Restructuring



In January 2017, we initiated a restructuring plan
with respect to our European sales team. The restructuring activities were substantially completed in the three months ended
March 31, 2017, and the related expenses consisted primarily of severance costs, facility lease termination costs and other
associated costs. These activities resulted in total charges of approximately $246,000, and are included in selling, general
and administrative expense within the accompanying unaudited condensed consolidated statements of operations for the three
and nine months ended March 31, 2017.



The following table presents details of the liability we recorded
related to the restructuring plan:





|                  |  | Nine Months Ended March 31,
    2017 |    
|----------------- |  | ------------------------------------ | ---
|                  |  | (In thousands)                       |    
|Beginning balance |  | $                                    | –  
|Charges           |  |                                      | 246
|Payments          |  |                                      | –  
|Ending balance    |  | $                                    | 246



Supplemental Cash Flow Information



The following table presents non-cash investing and financing
transactions excluded from the unaudited condensed consolidated statements of cash flows:



|                                                                    |  | Nine Months Ended |   
|------------------------------------------------------------------- |  | ----------------- | --
|                                                                    |  | March 31,         |   
|                                                                    |  | 2017              |   
|                                                                    |  | (In thousands)    |   
|Accrued property and equipment paid for in the subsequent period    |  | $                 | 17
|Non-cash acquisition of property and equipment under capital leases |  | $                 | – 
|Non-cash tenant improvements paid by landlord                       |  | $                 | – 





|3. | Warranty Reserve
|-- | ----------------



The standard warranty periods we provide for our products typically
range from one to five years. We establish reserves for estimated product warranty costs at the time revenue is recognized based
upon our historical warranty experience, and for any known or anticipated product warranty issues. Our warranty obligations are
impacted by a number of factors, including historical warranty costs, actual product failure rates, service delivery costs, and
the use of materials. If our actual results are different from our assumptions, increases or decreases to warranty reserves could
be required, which could impact our cost of revenue and gross margins.



The following table presents details of
our warranty reserve:





|                           |  | Nine Months Ended |     |   | Year Ended |  
|-------------------------- |  | ----------------- | --- | - | ---------- | -
|                           |  | March 31,         |     |   | June 30,   |  
|                           |  | 2017              |     |   | 2016       |  
|                           |  | (In thousands)    |    
|Beginning balance          |  | $                 | 138 |   |            | $
|Charged to cost of revenue |  |                   | 34  |   |            |  
|Usage                      |  |                   | (56 | ) |            |  
|Ending balance             |  | $                 | 116 |   |            | $



|4. | Bank Line of Credit
|-- | -------------------



We have entered into a Loan and Security Agreement (as amended,
the “Loan Agreement”) with Silicon Valley Bank (“SVB”), which provides a $4.0 million revolving line of
credit, based on qualified accounts receivable. The Loan Agreement has a maturity date of September 30, 2018.



The Loan Agreement provides for an interest rate per annum equal
to the greater of the prime rate plus 0.75% or 4.25%, provided that we maintain a monthly quick ratio of 1.0 to 1.0 or greater.
The quick ratio measures our ability to use our cash and cash equivalents maintained at SVB to extinguish or retire our current
liabilities immediately. If this ratio is not met, the interest rate will become the greater of the prime rate plus 1.25% or 4.25%.
At March 31, 2017, we met the 1.0 to 1.0 or greater quick ratio.









10






The Loan Agreement also includes a covenant requiring us
to maintain a certain Minimum Tangible Net Worth (“Minimum TNW”), currently required to be approximately $6.0
million. The Minimum TNW is subject to adjustment upward to the extent we raise additional equity or debt financing or
achieve net income in future quarters. Our Actual Tangible Net Worth (“Actual TNW”) is calculated as total
stockholders’ equity, less goodwill.



The following table presents the Minimum
TNW compared to our Actual TNW:





|            |  | March 31,      |       
|----------- |  | -------------- | ------
|            |  | 2017           |       
|            |  | (In thousands) |       
|Minimum TNW |  | $              | 6,021 
|Actual TNW  |  | $              | 10,806



The following table presents certain information with respect
to the Loan Agreement with SVB:





|                                             |  | March 31,      |       |  | June 30, |  
|-------------------------------------------- |  | -------------- | ----- |  | -------- | -
|                                             |  | 2017           |       |  | 2016     |  
|                                             |  | (In thousands) |      
|Outstanding borrowings on the line of credit |  | $              | –     |  |          | $
|Available borrowing capacity                 |  | $              | 2,778 |  |          | $
|Outstanding letters of credit                |  | $              | 51    |  |          | $



Our outstanding letters of credit are used as security deposits.



|5. | Stockholders’ Equity
|-- | --------------------



Stock Incentive Plans



Our stock incentive plans permit the granting of stock options
(both incentive and nonqualified stock options), restricted stock units (“RSUs”), stock appreciation rights, non-vested
stock, and performance shares to certain employees, directors and consultants. As of March 31, 2017, no stock appreciation rights,
non-vested stock, or performance shares were outstanding.



Stock Options



The following table presents a summary of activity during the
nine months ended March 31, 2017 with respect to our stock options:



|                                                 |  |                |       |   | Weighted-      |  
|------------------------------------------------ |  | -------------- | ----- | - | -------------- | -
|                                                 |  |                |       |   | Average        |  
|                                                 |  | Number of      |       |   | Exercise Price |  
|                                                 |  | Shares         |       |   | per Share      |  
|                                                 |  | (In thousands) |      
|Balance of options outstanding at June 30, 2016  |  |                | 3,606 |   |                | $
|Granted                                          |  |                | 864   |   |                |  
|Forfeited                                        |  |                | (45   | ) |                |  
|Expired                                          |  |                | (74   | ) |                |  
|Exercised                                        |  |                | (99   | ) |                |  
|Balance of options outstanding at March 31, 2017 |  |                | 4,252 |   |                | $















11






Restricted Stock Units



The following table presents a summary of activity during the
nine months ended March 31, 2017 with respect to our RSUs:



|                                              |  |                |      |   | Weighted-  |  
|--------------------------------------------- |  | -------------- | ---- | - | ---------- | -
|                                              |  |                |      |   | Average    |  
|                                              |  |                |      |   | Grant Date |  
|                                              |  | Number of      |      |   | Fair Value |  
|                                              |  | Shares         |      |   | per Share  |  
|                                              |  | (In thousands) |      |   |            |  
|Balance of RSUs outstanding at June 30, 2016  |  |                | 460  |   |            | $
|Granted                                       |  |                | 85   |   |            |  
|Vested                                        |  |                | (198 | ) |            |  
|Cancelled / forfeited                         |  |                | –    |   |            |  
|Balance of RSUs outstanding at March 31, 2017 |  |                | 347  |   |            | $





During the nine months ended March 31, 2017, a total of 187,500
RSUs vested pursuant to a RSU grant made in April 2016 to Jeffrey Benck, our chief executive officer. In connection with the vesting
of these RSUs, we issued approximately 112,000 shares of our common stock to Mr. Benck, and withheld the remaining approximately
76,000 shares for purposes of employee payroll taxes.



Employee Stock Purchase Plan



Our 2013 Employee Stock Purchase Plan (the “ESPP”)
is intended to provide employees with an opportunity to purchase our common stock through accumulated payroll deductions at the
end of a specified purchase period. Each of our employees (including officers) is eligible to participate in the ESPP, subject
to certain limitations as set forth in the ESPP.



The following table presents a summary of activity under our
ESPP during the nine months ended March 31, 2017:





|                                                |  | Number of      |     
|----------------------------------------------- |  | -------------- | ----
|                                                |  | Shares         |     
|                                                |  | (In thousands) |     
|Shares available for issuance at June 30, 2016  |  |                | 736 
|Shares issued                                   |  |                | (113
|Shares available for issuance at March 31, 2017 |  |                | 623 



Share-Based Compensation Expense



The following table presents a summary of share-based compensation
expense included in each functional line item on our unaudited condensed consolidated statements of operations:





|                                       |  | Three Months Ended |     |  | Nine Months Ended |  
|-------------------------------------- |  | ------------------ | --- |  | ----------------- | -
|                                       |  | March 31,          |     |  | March 31,         |  
|                                       |  | 2017               |     |  | 2016              |  
|                                       |  | (In thousands)     |    
|Cost of revenue                        |  | $                  | 12  |  |                   | $
|Selling, general and administrative    |  |                    | 169 |  |                   |  
|Research and development               |  |                    | 43  |  |                   |  
|Total share-based compensation expense |  | $                  | 224 |  |                   | $











12






The following table presents the remaining unrecognized share-based
compensation expense related to our outstanding share-based awards as of March 31, 2017:





|                                 |  | Remaining      |       |  | Remaining     | 
|-------------------------------- |  | -------------- | ----- |  | ------------- | 
|                                 |  | Unrecognized   |       |  | Weighted-     | 
|                                 |  | Compensation   |       |  | Average Years | 
|                                 |  | Expense        |       |  | To Recognize  | 
|                                 |  | (In thousands) |       |  |               | 
|Stock options                    |  | $              | 1,395 |  |               | 
|RSUs                             |  |                | 408   |  |               | 
|Stock purchase rights under ESPP |  |                | 128   |  |               | 



If there are any modifications or cancellations of the underlying
unvested share-based awards, we may be required to accelerate, increase or cancel remaining unearned share-based compensation expense.
Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional
share-based awards.



|6. | Income Taxes
|-- | ------------



We utilize the liability method of accounting for income taxes.
The following table presents our effective tax rates based upon our provision for income taxes for the periods shown:





|                   |  | Three Months Ended |     |  | Nine Months Ended | 
|------------------ |  | ------------------ | --- |  | ----------------- | 
|                   |  | March 31,          |     |  | March 31,         | 
|                   |  | 2017               |     |  | 2016              | 
|Effective tax rate |  |                    | 12% |  |                   | 



The difference between our effective tax rates in the periods
presented above and the federal statutory rate is primarily due to a tax benefit from our domestic losses being recorded with a
full valuation allowance, as well as the effect of foreign earnings taxed at rates differing from the federal statutory rate.



We record net deferred tax assets to the extent  we
believe it is more likely than not that these assets will be realized. As a result of our cumulative losses and uncertainty
of generating future taxable income, we have provided a full valuation allowance against our net deferred tax assets as of
March 31, 2017 and June 30, 2016.



|7. | Commitments and Contingencies
|-- | -----------------------------



From time to time, we are involved in various legal proceedings
and claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted
with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate,
have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the
outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other
factors.















13






|Item 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------





The following discussion and analysis of our financial condition
and results of operations should be read together with our unaudited condensed consolidated financial statements and the related
notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the three months ended March 31, 2017, or this Report.
This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans,
estimates and anticipated future financial performance. See the section of this Report entitled “Cautionary Note Regarding
Forward-Looking Statements” for additional information. These statements involve numerous risks and uncertainties. Our actual
results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors,
including those set forth in “Risk Factors” in Part II, Item 1A of this Report.



Overview



Lantronix, Inc., which we refer to herein as the Company, Lantronix,
we, our, or us, is a global provider of secure data access and management solutions for Internet of Things, or IoT, and information
technology, or IT, assets. Our mission is to be the leading supplier of IoT gateways that enable companies to dramatically simplify
the creation, deployment, and management of IoT projects while providing secure access to data for applications and people.



We conduct our business globally and manage our sales teams
by three geographic regions: the Americas; Europe, Middle East, and Africa, or EMEA; and Asia Pacific Japan, or APJ.



Products and Solutions Overview



We organize our products and solutions
into three product lines: IoT, IT Management and Other.



IoT



Our IoT products typically connect to one or more existing machines,
provide network connectivity and are designed to enhance the value and utility of machines by making the data from the machines
available to users, systems and processes or by controlling their properties and features over available networks.



Our IoT products currently consist of IoT Gateways and IoT Building
Blocks. IoT Gateways are designed to provide secure connectivity and the ability to add integrated device management and advanced
data access features. IoT Building Blocks provide basic secure machine connectivity and unmanaged data access.



The following product families are included in our IoT product
line: EDS, EDS-MD®, PremiereWave® product families, UDS, WiPort®, xDirect®, xPico®, xPico® Wi-Fi, xPressTM 
and XPort®,



IT Management



Our IT Management product line includes console management,
power management, and keyboard video mouse products that provide remote out-of-band management access to IT and networking infrastructure
deployed in test labs, data centers and server rooms.



The following product families are included in our IT Management
product line: SLBTM, SLCTM 8000 and SpiderTM. In addition, our IT Management product line includes vSLMTM,
a virtualized central management solution that simplifies secure administration of enterprise IT out-of-band devices and attached
equipment through a standard web browser. vSLM is designed to operate with both our IT Management products and certain other manufacturers’
IT infrastructure equipment.



Other



We categorize products that are non-focus or end-of-life as
Other. Our Other product line includes non-focus products such as the xPrintServer®, xSenso®, and WiBox®. In addition,
our Other product line includes end-of-life versions of our MatchPort®, SLCTM, SLPTM, and xPress ProTM product
families.



Recent Accounting Pronouncements



Refer to Note 1 of Notes to Unaudited Condensed Consolidated
Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of
recent accounting pronouncements.









14






Critical Accounting Policies and Estimates



The accounting policies that have the greatest impact on our
financial condition and results of operations and that require the most judgment are those relating to revenue recognition, warranty
reserves, allowance for doubtful accounts, inventory valuation, valuation of deferred income taxes, and goodwill. These policies
are described in further detail in the Form 10-K. There have been no significant changes in our critical accounting policies and
estimates during the three months ended March 31, 2017 as compared to what was previously disclosed in the Form 10-K.



Results of Operations – Three
Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016



Summary



In the three months ended March 31, 2017 our net
revenue increased by $1.6 million, or 15.7%, compared to the three months ended March 31, 2016. The increase in net revenue
was primarily due to sales growth in both our IoT and IT Management product lines, which was partially offset by a decrease
in sales in our Other product line. We had a net loss of $162,000 for the three months ended March 31, 2017 compared to a
net loss of $456,000 for the three months ended March 31, 2016. Our net losses for the three months ended March 31, 2017 and
2016 included restructuring charges of $246,000 and $247,000, respectively. Our net loss for the three months ended March 31,
2017 was lower than for the three months ended March 31, 2016  primarily due to  the increase in net revenue and a 33.9%
increase in gross profit, which was partially offset by increased operating expenses of approximately 25.5%.



Net Revenue



The following tables present our fiscal
quarter net revenue by product line and by geographic region:





|              |  | Three Months Ended March 31,       |        |  |          |  |        |      | 
|------------- |  | ---------------------------------- | ------ |  | -------- |  | ------ | ---- | 
|              |  |                                    |        |  | % of Net |  |        |      | 
|              |  | 2017                               |        |  | Revenue  |  |        | 2016 | 
|              |  | (In thousands, except percentages) |       
|IoT           |  | $                                  | 8,644  |  |          |  | 75.0%  |      | 
|IT Management |  |                                    | 2,569  |  |          |  | 22.3%  |      | 
|Other         |  |                                    | 311    |  |          |  | 2.7%   |      | 
|              |  | $                                  | 11,524 |  |          |  | 100.0% |      | 





|                   |  | Three Months Ended March 31,       |        |  |          |  |        |      | 
|------------------ |  | ---------------------------------- | ------ |  | -------- |  | ------ | ---- | 
|                   |  |                                    |        |  | % of Net |  |        |      | 
|                   |  | 2017                               |        |  | Revenue  |  |        | 2016 | 
|                   |  | (In thousands, except percentages) |       
|Americas           |  | $                                  | 6,625  |  |          |  | 57.5%  |      | 
|EMEA               |  |                                    | 3,392  |  |          |  | 29.4%  |      | 
|Asia Pacific Japan |  |                                    | 1,507  |  |          |  | 13.1%  |      | 
|                   |  | $                                  | 11,524 |  |          |  | 100.0% |      | 



IoT



Net revenue from our IoT product line for the three
months ended March 31, 2017 increased compared to the three months ended March 31, 2016 due to growth in unit sales for a
variety of our product families in different geographic regions including (i) XPort in both the Americas and EMEA regions,
(ii) EDS and Premierwave XN in the Americas region and (iii) Premierwave 2050, a newer product, in the APJ region. The
increase in XPort sales in the Americas region was largely due to production purchases by two customers. The overall increase
was partially offset by decreases in unit sales of some of our legacy products, including the UDS and Micro product families.



IT Management



Net revenue from our IT Management product line for the
three months ended March 31, 2017 increased compared to the three months ended March 31, 2016 primarily due to growth in unit
sales for the SLC 8000 product family, largely in the Americas region, and to a lesser extent, the EMEA and APJ regions. The
increase in SLC 8000 sales in the Americas region benefited from a couple of large customer deployments. We also
experienced growth in unit sales of our SLB product family, primarily in the Americas and APJ regions.









15






Other



Net revenue from our Other products, which are comprised
of non-focus and end-of-life product families, continued to decline in line with our expectations.



Gross Profit



Gross profit represents net revenue less cost of revenue. Cost
of revenue consists primarily of the cost of raw material components, subcontract labor assembly from contract manufacturers, manufacturing
overhead, establishing or relieving inventory reserves for excess and obsolete products or raw materials, warranty costs, royalties
and share-based compensation.



The following table presents our fiscal
quarter gross profit:





|             |  | Three Months Ended March 31,       |       |  |          |  |       |      | 
|------------ |  | ---------------------------------- | ----- |  | -------- |  | ----- | ---- | 
|             |  |                                    |       |  | % of Net |  |       |      | 
|             |  | 2017                               |       |  | Revenue  |  |       | 2016 | 
|             |  | (In thousands, except percentages) |      
|Gross profit |  | $                                  | 6,398 |  |          |  | 55.5% |      | 



Gross profit as a percent of
revenue (referred to as “gross margin”) for the three months ended March 31, 2017 improved compared to the three
months ended March 31, 2016 primarily  due to improved product mix as some of our higher margin products, such as the SLC
8000 and XPort contributed to a larger portion of our net revenue. We also benefited from moderate decreases in costs
associated with overhead, scrap and warranty as compared to the prior year period.



Selling, General and Administrative



Selling, general and administrative expenses consist of personnel-related
expenses, including salaries and commissions, share-based compensation, facility expenses, information technology, trade show expenses,
advertising, and legal and accounting fees.



The following table presents our fiscal
quarter selling, general and administrative expenses:





|                                       |  | Three Months Ended March 31,       |       |  |          |  |       |      | 
|-------------------------------------- |  | ---------------------------------- | ----- |  | -------- |  | ----- | ---- | 
|                                       |  |                                    |       |  | % of Net |  |       |      | 
|                                       |  | 2017                               |       |  | Revenue  |  |       | 2016 | 
|                                       |  | (In thousands, except percentages) |      
|Personnel-related expenses             |  | $                                  | 3,160 |  |          |  |       |      | 
|Restructuring and severance expenses   |  |                                    | 246   |  |          |  |       |      | 
|Professional fees and outside services |  |                                    | 221   |  |          |  |       |      | 
|Advertising and marketing              |  |                                    | 254   |  |          |  |       |      | 
|Facilities and insurance               |  |                                    | 234   |  |          |  |       |      | 
|Share-based compensation               |  |                                    | 169   |  |          |  |       |      | 
|Depreciation                           |  |                                    | 56    |  |          |  |       |      | 
|Other                                  |  |                                    | 74    |  |          |  |       |      | 
|Selling, general and administrative    |  | $                                  | 4,414 |  |          |  | 38.3% |      | 



Selling, general and administrative expenses increased due to
higher headcount-related expenses, primarily related to variable compensation. The overall increase was partially offset by lower
spending on outside marketing programs and trade shows as we continue our efforts to reevaluate and focus our marketing activities.



In January 2017, we initiated a restructuring plan with
respect to our European sales team. The restructuring activities were substantially completed by March 31, 2017, and
the related restructuring and severance expenses consisted primarily of severance costs, facility lease termination costs and
other associated costs.



For the three months ended March 31, 2016,
the “Restructuring and severance expenses” line item in the table above includes (i) $223,000 in charges
for severance costs, lease termination costs and other associated costs related to a strategic realignment plan initiated in
February 2016 and (ii) $62,000 in other severance expenses.











16






Research and Development



Research and development expenses consist of personnel-related
expenses, including share-based compensation, as well as expenditures to third-party vendors for research and development activities
and product certification costs. Our quarterly costs related to outside services and product certifications vary from period to
period depending on our level of development activities.



The following table presents our fiscal quarter research and
development expenses:





|                                     |  | Three Months Ended March 31,       |       |  |          |  |       |      | 
|------------------------------------ |  | ---------------------------------- | ----- |  | -------- |  | ----- | ---- | 
|                                     |  |                                    |       |  | % of Net |  |       |      | 
|                                     |  | 2017                               |       |  | Revenue  |  |       | 2016 | 
|                                     |  | (In thousands, except percentages) |      
|Personnel-related expenses           |  | $                                  | 1,669 |  |          |  |       |      | 
|Restructuring and severance expenses |  |                                    | –     |  |          |  |       |      | 
|Facilities                           |  |                                    | 193   |  |          |  |       |      | 
|Outside services                     |  |                                    | 52    |  |          |  |       |      | 
|Product certifications               |  |                                    | 96    |  |          |  |       |      | 
|Share-based compensation             |  |                                    | 43    |  |          |  |       |      | 
|Other                                |  |                                    | 73    |  |          |  |       |      | 
|Research and development             |  | $                                  | 2,126 |  |          |  | 18.4% |      | 



Research and development expenses increased primarily due
to higher personnel-related expenses, driven primarily by (i) higher variable compensation,  (ii) additional headcount
attributable to the growth of our engineering team in India and (iii) higher product certification expenses. The overall
increase in research and development expenses was partially offset by a decrease  in outside services for
engineering resources, as we have redirected a large portion of this spending toward funding the expansion of our team in
India.



Results of Operations – Nine Months
Ended March 31, 2017 Compared to the Nine Months Ended March 31, 2016



Summary



In the nine months ended March 31, 2017 our net revenue increased
by $3.6 million, or 12.0%, compared to the nine months ended March 31, 2016. The increase in net revenue was primarily due to
sales growth in both our IoT and IT Management product lines, which was partially offset by a decrease in sales in our Other product
line. We had a net loss of $225,000 for the nine months ended March 31, 2017 compared to a net loss of $1.7 million for the
nine months ended March 31, 2016. The decrease in net loss was primarily due to an increase in net revenue and a 24.1% increase
in gross profit. The overall decrease in our net loss was partially offset by a 12.0% increase in operating expenses.



Net Revenue



The following tables present our fiscal
year-to-date net revenue by product line and by geographic region:





|              |  | Nine Months Ended March 31,        |        |  |          |  |        |      | 
|------------- |  | ---------------------------------- | ------ |  | -------- |  | ------ | ---- | 
|              |  |                                    |        |  | % of Net |  |        |      | 
|              |  | 2017                               |        |  | Revenue  |  |        | 2016 | 
|              |  | (In thousands, except percentages) |       
|IoT           |  | $                                  | 24,817 |  |          |  | 73.7%  |      | 
|IT Management |  |                                    | 7,271  |  |          |  | 21.6%  |      | 
|Other         |  |                                    | 1,598  |  |          |  | 4.7%   |      | 
|              |  | $                                  | 33,686 |  |          |  | 100.0% |      | 













17








|                   |  | Nine Months Ended March 31,        |        |  |          |  |        |      | 
|------------------ |  | ---------------------------------- | ------ |  | -------- |  | ------ | ---- | 
|                   |  |                                    |        |  | % of Net |  |        |      | 
|                   |  | 2017                               |        |  | Revenue  |  |        | 2016 | 
|                   |  | (In thousands, except percentages) |       
|Americas           |  | $                                  | 19,244 |  |          |  | 57.1%  |      | 
|EMEA               |  |                                    | 9,615  |  |          |  | 28.5%  |      | 
|Asia Pacific Japan |  |                                    | 4,827  |  |          |  | 14.4%  |      | 
|                   |  | $                                  | 33,686 |  |          |  | 100.0% |      | 



IoT



Net revenue from our IoT product line for the nine
months ended March 31, 2017 increased compared to the nine months ended March 31, 2016 due to growth in unit sales for a
variety of our product families in different geographic regions, including  (i) XPort and EDS, both largely in the Americas
region, (ii) xDirect and Premierwave XN product families, largely in the Americas region and (iii) xPico in both the
Americas and EMEA regions. The overall increase was partially offset by decreases in unit sales of some of our legacy
products, including the UDS and Micro product families.



IT Management



Net revenue from our IT Management product line for the
nine months ended March 31, 2017 increased compared to the nine months ended March 31, 2016 primarily due to growth in unit
sales for the SLC 8000 product family, largely in the Americas region, and  to a lesser extent, the EMEA and APJ regions. We
also experienced modest year-over-year growth in unit sales of our SLB product family, primarily in the Americas region.



Other



Net revenue from our Other products, which are
comprised of non-focus and end-of-life product families, continued to decline in line with our expectations.



Gross Profit



The following table presents our fiscal
year-to-date gross profit:





|             |  | Nine Months Ended March 31,        |        |  |          |  |       |      | 
|------------ |  | ---------------------------------- | ------ |  | -------- |  | ----- | ---- | 
|             |  |                                    |        |  | % of Net |  |       |      | 
|             |  | 2017                               |        |  | Revenue  |  |       | 2016 | 
|             |  | (In thousands, except percentages) |       
|Gross profit |  | $                                  | 17,910 |  |          |  | 53.2% |      | 



Gross margin for the nine months ended
March 31, 2017 improved compared to the nine months ended March 31, 2016 primarily due to improved product mix as some of our higher
margin products, such as the SLC 8000 and XPort, contributed to a larger portion of our net revenue. We also benefited from lower
overhead costs.











18






Selling, General and Administrative



The following table presents our fiscal
year-to-date selling, general and administrative expense:





|                                       |  | Nine Months Ended March 31,        |        |  |          |  |       |      | 
|-------------------------------------- |  | ---------------------------------- | ------ |  | -------- |  | ----- | ---- | 
|                                       |  |                                    |        |  | % of Net |  |       |      | 
|                                       |  | 2017                               |        |  | Revenue  |  |       | 2016 | 
|                                       |  | (In thousands, except percentages) |       
|Personnel-related expenses             |  | $                                  | 8,758  |  |          |  |       |      | 
|Restructuring and severance expenses   |  |                                    | 246    |  |          |  |       |      | 
|Professional fees and outside services |  |                                    | 840    |  |          |  |       |      | 
|Advertising and marketing              |  |                                    | 585    |  |          |  |       |      | 
|Facilities and insurance               |  |                                    | 689    |  |          |  |       |      | 
|Share-based compensation               |  |                                    | 480    |  |          |  |       |      | 
|Depreciation                           |  |                                    | 166    |  |          |  |       |      | 
|Other                                  |  |                                    | 365    |  |          |  |       |      | 
|Selling, general and administrative    |  | $                                  | 12,129 |  |          |  | 36.0% |      | 



Selling, general and administrative expenses increased
largely due to higher headcount-related expenses, primarily related to variable compensation. The overall increase was
partially offset by (i) lower spending on outside marketing programs and trade shows as we continue our efforts to reevaluate
and focus our marketing activities, (ii) lower restructuring and severance expenses and (iii) lower spending on certain
facilities-related expenses.



In January 2017, we initiated a restructuring plan with
respect to our European sales team. The restructuring activities were substantially completed by March 31, 2017, and
the related restructuring and severance expenses consisted primarily of severance costs, facility lease termination costs and
other associated costs.



For the nine months ended March 31, 2016,
the “Restructuring and severance expenses” line item in the table above includes (i) $223,000 in charges
for severance costs, lease termination costs and other associated costs related to a strategic realignment plan initiated in
February 2016, (ii) a $286,000 charge related to severance for our former President and Chief Executive Office and (iii)
$62,000 in other severance expenses.



Research and Development



The following table presents our fiscal
year-to-date research and development expenses:





|                                     |  | Nine Months Ended March 31,        |       |  |          |  |       |      | 
|------------------------------------ |  | ---------------------------------- | ----- |  | -------- |  | ----- | ---- | 
|                                     |  |                                    |       |  | % of Net |  |       |      | 
|                                     |  | 2017                               |       |  | Revenue  |  |       | 2016 | 
|                                     |  | (In thousands, except percentages) |      
|Personnel-related expenses           |  | $                                  | 4,520 |  |          |  |       |      | 
|Restructuring and severance expenses |  |                                    | –     |  |          |  |       |      | 
|Facilities                           |  |                                    | 597   |  |          |  |       |      | 
|Outside services                     |  |                                    | 281   |  |          |  |       |      | 
|Product certifications               |  |                                    | 226   |  |          |  |       |      | 
|Share-based compensation             |  |                                    | 129   |  |          |  |       |      | 
|Other                                |  |                                    | 191   |  |          |  |       |      | 
|Research and development             |  | $                                  | 5,944 |  |          |  | 17.6% |      | 





Research and development expenses increased primarily due to
higher personnel-related expenses, driven by (i) higher variable compensation and (ii) additional headcount and facility expenses
attributable to the growth of our engineering team in India. The overall increase in research and development expenses was partially
offset by a decrease in outside services for engineering resources, as we have redirected a large portion of this
spending toward funding the expansion of our team in India.









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Provision for Income Taxes



The following table presents our effective tax rate based upon
our provision for income taxes:



|                   |  | Three Months Ended |     |  | Nine Months Ended | 
|------------------ |  | ------------------ | --- |  | ----------------- | 
|                   |  | March 31,          |     |  | March 31,         | 
|                   |  | 2017               |     |  | 2016              | 
|Effective tax rate |  |                    | 12% |  |                   | 



We utilize the liability method of accounting for income taxes.
The difference between our effective tax rates and the federal statutory rate resulted primarily from a tax benefit from our domestic
losses being recorded with a full valuation allowance, as well as the effect of foreign earnings taxed at rates differing from
the federal statutory rate.



We record net deferred tax assets to the extent that we
believe it is more likely than not that these assets will be realized. As a result of our cumulative losses and uncertainty
of generating future taxable income, we have provided a full valuation allowance against our net deferred tax assets as of
March 31, 2017 and June 30, 2016.



Liquidity and Capital Resources



The following table presents details of our working capital
and cash and cash equivalents:





|                          |  | March 31,      |       |  | June 30, |   |       |        | 
|------------------------- |  | -------------- | ----- |  | -------- | - | ----- | ------ | 
|                          |  | 2017           |       |  | 2016     |   |       | Change | 
|                          |  | (In thousands) |      
|Working capital           |  | $              | 9,928 |  |          | $ | 9,061 |        | 
|Cash and cash equivalents |  | $              | 7,389 |  |          | $ | 5,962 |        | 



Our principal sources of cash and liquidity include our existing
cash and cash equivalents, borrowings available under our loan agreement, and cash generated from operations. We believe that these
sources will be sufficient to fund our current requirements for working capital, capital expenditures and other financial commitments
for at least the next 12 months. We anticipate that the primary factors affecting our cash and liquidity are net revenue and working
capital requirements.



Management defines cash and cash equivalents as highly liquid
deposits with original maturities of 90 days or less when purchased. We maintain cash and cash equivalents balances at certain
financial institutions in excess of amounts insured by federal agencies. Management does not believe this concentration subjects
us to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We frequently monitor
the third-party depository institutions that hold our cash and cash equivalents. Our investment policy primarily emphasizes safety
of principal and secondarily emphasizes maximizing yield.



Our future working capital requirements will depend on many
factors, including the timing and amount of our net revenue, any future restructuring or cost-cutting measures that we may implement
from time to time, research and development expenses, expenses associated with any strategic partnerships or acquisitions, infrastructure
investments and fundraising activities.



From time to time, we may seek additional capital from
public or private offerings of our capital stock, borrowings under our existing or future credit lines or other sources in
order to (i) develop or enhance our products, (ii) take advantage of strategic opportunities, (iii) respond to competition or
(iv) continue to operate our business. We currently have an effective Form S-3 shelf registration statement on file with the
SEC. If we issue equity securities to raise additional funds, our existing stockholders may experience dilution, and the new
equity securities may have rights, preferences and privileges senior to those of our existing stockholders. If we issue debt
securities to raise additional funds, we may incur debt service obligations, become subject to additional restrictions that
limit or restrict our ability to operate our business, or be required to further encumber our assets. There can be no
assurance that we will be able to raise any such capital on terms acceptable to us, if at all.



Bank Line of Credit



Refer to Note 4 of Notes to Unaudited Condensed Consolidated
Financial Statements, included in Part I, Item 1 of this Report, which is incorporated herein by reference, for a discussion of
our loan agreement.









20






Cash Flows



The following table presents the major
components of the unaudited condensed consolidated statements of cash flows:





|                                                    |  | Nine Months Ended |       |   |      |  
|--------------------------------------------------- |  | ----------------- | ----- | - | ---- | -
|                                                    |  | March 31,         |       |   |      |  
|                                                    |  | 2017              |       |   | 2016 |  
|                                                    |  | (In thousands)    |      
|Net cash provided by (used in) operating activities |  | $                 | 1,464 |   |      | $
|Net cash used in investing activities               |  |                   | (144  | ) |      |  
|Net cash provided by (used in) financing activities |  |                   | 107   |   |      |  



Operating Activities



Net cash provided by operating activities during the nine
months ended March 31, 2017 increased as compared to cash used  in operating activities during the nine months ended March
31, 2016 primarily due to a decrease in our net loss to $225,000 in the nine months ended March 31, 2017 as compared to our
$1.7 million net loss in the nine months ended March 31, 2016.



Inventories increased approximately $1.1 million, or
16.4%, as compared to June 30, 2016 as we have increased stock in certain products. The impact of the increase in inventories
on operating cash flows was largely offset by increases in (i) accrued payroll and related expenses, which are primarily
associated with accruals for variable compensation and (ii) other current liabilities, which are primarily associated with
deferred revenue for certain distributor customers. Cash provided by operating activities during the nine months ended March
31, 2017 also increased due to a decrease in accounts receivable of approximately 10.7% from June 30, 2016 to March 31, 2017,
which was driven by differences in the timing of our sales and collections during the quarter ended March 31, 2017 as
compared to the quarter ended June 30, 2016.



Investing Activities



Net cash used in investing activities was related to capital
expenditures for the purchase of property and equipment, primarily related to tooling and test equipment, as well as acquisitions
of hardware and equipment for our software lab in India.



Financing Activities



Net cash provided by financing activities during the
nine months ended March 31, 2017 resulted primarily from cash we received from the issuance of common stock to employees
in connection with stock option exercises and purchases made under our Employee Stock Purchase Plan. This was partially
offset by payments related to withholding taxes in connection with the vesting of restricted stock units  and capital
leases.



Off-Balance Sheet Arrangements





As of March 31, 2017, we did not have any relationships with
unconsolidated organizations or financial partnerships, including structured finance or special purpose entities, that have been
established for the purpose of facilitating off-balance sheet arrangements or for other purposes.



|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk
|------- |  | ----------------------------------------------------------



As a smaller reporting company, we are not required to provide
the information required by this Item 3.



|Item 4. |  | Controls and Procedures
|------- |  | -----------------------



(a) Evaluation of Disclosure Controls and Procedures



We maintain disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.



We carried out an evaluation, under the supervision and with
the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based
upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and
procedures were effective as of March 31, 2017 at the reasonable assurance level.









21






(b) Changes in Internal Controls over Financial Reporting



There were no changes in our internal control over financial
reporting identified in connection with the evaluation required by Rule 13a-15(f) and 15d-15(f) of the Exchange Act that occurred
during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.



(c) Inherent Limitation on Effectiveness of Controls



A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with
policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.



PART II. OTHER INFORMATION



|Item 1. |  | Legal Proceedings
|------- |  | -----------------



From time to time, we are involved in various legal proceedings
and claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted
with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate,
have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the
outcome, litigation can have an adverse impact on us because of legal costs, diversion of management time and resources, and other
factors.



|Item 1A. |  | Risk Factors
|-------- |  | ------------



An investment in our common stock involves risks. Before making
an investment decision, you should carefully consider all of the information in this Report, including in the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of
this Report, and the unaudited condensed consolidated financial statements and related notes thereto. In addition, you should carefully
consider the risks and uncertainties described in the section entitled “Risk Factors” in the Form 10-K, as well as
in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating
results and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline,
and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not
currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects.



|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds
|------- |  | -----------------------------------------------------------



None.



|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------



None.



|Item 4. |  | Mine Safety Disclosures
|------- |  | -----------------------



Not applicable.



|Item 5. |  | Other Information
|------- |  | -----------------



None.



|Item 6. |  | Exhibits
|------- |  | --------



See the “Exhibit Index” immediately following the signature page
of this Report, which is incorporated herein by reference.









22






SIGNATURES



Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     | LANTRONIX, INC. |                                             
|-------------------- | --------------- | --------------------------------------------
|                     |                 |                                             
|Date: April 28, 2017 | By:             | /s/ JEFFREY BENCK                           
|                     |                 | Jeffrey Benck                               
|                     |                 | President and Chief Executive Officer       
|                     |                 | (Principal Executive Officer)               
|                     |                 |                                             
|                     |                 |                                             
|Date: April 28, 2017 | By:             | /s/ JEREMY WHITAKER                         
|                     |                 | Jeremy WhitakerChief Financial Officer      
|                     |                 | (Principal Financial and Accounting Officer)



























23






EXHIBIT INDEX



|                       |                                                                                                                                                                       |                           | Incorporated by Reference
|---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------------------------
|Exhibit
        Number | Description                                                                                                                                                           | Provided
        Herewith | Form                     
|                       |                                                                                                                                                                       |                           |                          
|31.1                   | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                | X                         |                          
|                       |                                                                                                                                                                       |                           |                          
|31.2                   | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                | X                         |                          
|                       |                                                                                                                                                                       |                           |                          
|32.1*                  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X                         |                          
|                       |                                                                                                                                                                       |                           |                          
|101.INS                | XBRL Instance Document                                                                                                                                                | X                         |                          
|101.SCH                | XBRL Taxonomy Extension Schema Document                                                                                                                               | X                         |                          
|101.CAL                | XBRL Taxonomy Extension Calculation Linkbase Document                                                                                                                 | X                         |                          
|101.DEF                | XBRL Taxonomy Extension Definition Linkbase Document                                                                                                                  | X                         |                          
|101.LAB                | XBRL Taxonomy Extension Label Linkbase Document                                                                                                                       | X                         |                          
|101.PRE                | XBRL Taxonomy Extension Presentation Linkbase Document                                                                                                                | X                         |                          

_________________

|* |  | Furnished, not filed.
|- |  | ---------------------



























24